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Overnight index swaps

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Published: 25th March 2017 by William Webster

Overnight index swaps (OIS) are interest rate swaps. There is an active and liquid market for these swaps going out two years and beyond depending on currency. The notional sizes dealt can be much larger than for fixed rate - Libor swaps. The trade is based on a notional amount (no exchange of principle) this is used in the calculation of the interest payments.

One party pays a fixed rate of interest. The other pays a variable rate. The variable rate is linked to the unsecured overnight rate. For example, the Fed Funds rate, Euro Overnight Index Average (EONIA) or Sterling Overnight Index Average (SONIA). The overnight rate is compounded daily. At the end of the deal the fixed payment is netted out with the floating payment.

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